1. Chapter 11 Dividends and Share Repurchase: Theory and Practice

2. Procedural Aspects of Paying Dividends
Date of record
Entitled to the dividends
Ex-dividend date
3 business days before the date of record
Capital impairment rule

3. Dividend Payout Irrelevance
Dividends as a residual
Pay out only excess cash
Strictly a financing decision
Smooth out actual payments
MM position
Argue for irrelevance
Dividends versus terminal value
Stockholder is indifferent between dividends and retention of earnings
Homemade dividends

4. Arguments for Dividend Payout Mattering
Unimportance of corporate income taxes
Taxes on the investor and negative dividend effect
Tax wedge
Financing/dividend forgone indifference
Irrelevance under uncertainty
Intercorporate dividend exclusion
Dividends effect on value
Dividend neutrality
Clienteles of investors
Completing markets
Positive dividend effect
Behavioral reasons

5. Impact of Other Imperfections
Flotation costs
Favors the retention of earnings
Stock financing is lumpy
Transaction costs and divisibility of securities
Restricts the arbitrage process
Divisibility problems
Institutional restrictions
Seek stocks paying reasonable dividends

6. Financial Signaling Cash dividends speak louder than words
Occur if the dividend is more or less than expected
Price of the stock may react to unanticipated changes in dividends

7. Empirical Testing and Implications for Payout
Ex-dividend day tests
Behavior of common stock prices
Dividend-yield approach
Relationship between dividend yields and stock returns
Financial signaling studies
At the time of the dividend change find that there is a significant earnings change

8. Implications for Corporate Policy
Tax effect consistent with dividend neutrality
Signaling effect
Optimal dividend policy
Maximize shareholder wealth
Excess cash

9. Share Repurchase Increased in importance relative to dividends
Substitute for cash dividends
Employee stock options and share repurchase
Means to compensate employees
Employees with existing stock options prefer share repurchase

10. Method of Repurchase Fixed-price tender offer
Formal offer to stockholders to purchase so many shares at a set price
Dutch-auction tender offer
Dominant form of tender offer
Open-market purchase
SEC rules
Disclose intentions

11. Repurchasing as Part of a Dividend Decision
Fewer shares remaining outstanding
EPS rise
Dividends per share rise
Market price per share should rise
Equilibrium formula
Personal tax effect
Signaling effect
Differs with the method of repurchase

12. Stock Dividends No reduction of par value
Accounting treatment differences
Small-percentage stock dividend
Large-percentage stock dividend

13. Stock Splits
Number of shares is increased through a proportional reduction in the par value
May increase cash dividends
Place the stock in a more-popular trading range
Informational or signaling effect
Asymmetric information
Perceived earnings
Not the stock dividend nor split itself
Reverse stock split
Reduce the number of shares
Usually a negative signal

14. Managerial Considerations as to Dividend/Share-Repurchase Policy
Funds needs of the firm
Ability to borrow
Control
Nature of stockholders
Liquidity
Restrictions
Dividend stability
Target-payout ratios
Assessment of any valuation information

15. Some Final Observations
Dividend in excess of residual implies a favorable effect on shareholder wealth
Lack of clear empirical evidence
Many companies believe dividend payout affects share price
Repurchase of stock
When sizable amount of excess funds exists
Increasingly more important